Posted by Nolan Miller on May 26, 2011

There has been much consternation regarding the state’s recent decision not to include Health Alliance among the HMO offerings available to state employees. For those of you who haven’t been following it, Health Alliance is the HMO associated with the Carle Clinic system, one of the primary healthcare providers in the area. According to the News-Gazette, the reason why the state chose Blue Cross Blue Shield over Health Alliance was that Health Alliance, whose bid was about 16 percent above BCBS, had bid too high, and was unwilling to lower their bid any further.

Because of Health Alliance being excluded from the state’s HMO offerings, many UI workers will face the choice of switching into the more-expensive Quality Care Health Plan, a plan with a very extensive network, or into one of the Open Access Plans which, based on what I can see, are pretty vaguely defined, or changing their provider. This choice is complicated by the fact that other local healthcare providers have said that they don’t have the capacity to absorb Health Alliance’s customers.

So, what to do? The answer is easy, and traces back to an idea health economists, especially Alain Enthoven, started talking about in the during the early 1990’s called “Managed Competition.” The idea in a nutshell is that an employer like the State should make multiple managed care (i.e., HMO) offerings available to its employees through a competitive bidding process where the employer’s contribution to the employee’s insurance is a fixed dollar amount, often one pegged to the lowest bid. So, suppose the employer agrees to pay 80% of the lowest bid and there are two HMO options available. HMO ABC bids $100 to cover an employee, while HMO XYZ bids $120. In this case, the employer would pay $80 toward an employee’s insurance regardless of which plan he chose. An employee choosing ABC would pay $20 per month, while an employee choosing XYZ would pay $40 per month.

Managed competition has several nice features. First, by charging employees who choose the more expensive plan the difference in the plan cost, you give employees incentives to seek out and choose high value plans. In deciding whether to choose ABC or XYZ, they ask themselves whether the extra $20 per month is worth it and “vote with their feet.” Second, because employees are actively seeking high-value care, the HMOs now have a stronger incentive to lower their cost and provide higher quality. In other words, by creating a type of “internal market” for health plans, the employer promotes competition to the employer and employees’ benefit. Of course, insurers may not be too happy, but they can always choose to withdraw from the employer if they don’t feel they’re being adequately compensated.

So, what should the State of Illinois do? Easy, offer Health Alliance to employees who want it, but charge them 16% more than they charge for the BCBS plan. Employees who value Health Alliance’s provider network will pay the extra money, while those who do not will choose one of the other options.

In fact, the State already offers two HMO options, BCBS and HMO Illinois and charges $16 more per month for families (two adults and at least on child) choosing HMO Illinois. So, why not just offer Health Alliance, too? I can’t find the bid information here, but if it means charging Health Alliance members an extra $10 or $20 or $50 dollars per month, why should the state care? Its cost is the same regardless of which plan the employee chooses? Employees who value Health Alliance will pay the extra, those that do not won’t, and there you go. Now, part of the problem with Health Alliance’s high bid may be that there is not enough competition in the Champaign-Urbana area, but adopting this policy will also encourage new entrants into the local market who could induce Health Alliance to lower its prices.

ADDENDUM (5/27/2010): OK. So the more I thought about it, the less happy I was with the post above. While the managed competition model has a lot going for it, the system the state has set up, where there is little geographic competition among the HMO offerings, does not really give managed competition a chance to work. A couple of additional points:

(1) Competition: if the state wants to bring down healthcare costs, it should be promoting competition. So, it should have a goal of ensuring that there are multiple plan offerings competing in any particular geographic area. But, this might be likely to be more successful in denser areas that can support multiple, competing healthcare systems. Downstate areas, which are less densely populated, may need another approach.

(2) Affordability: the main problem with the argument I laid out above is one of “affordability.” If health care is just more expensive downstate, then a managed competition approach applied uniformly across the state will mean that people living downstate pay more out of pocket for health insurance. One solution would be to adjust the fixed payment for health plans based on local cost conditions. However, we would want to keep in mind that healthcare costs are one part of the “cost of living.” Downstate areas, if they have higher healthcare costs, offset that with lower housing costs, gas costs, etc. So, it is unclear to me whether the right way to deal with this is through the employer’s system of paying for health insurance, or whether this is just another factor that contributes to differences in the cost of living that are better addressed through wage differences.

3 Responses to “Psst … State of Illinois. Yeah, you. Here’s what to do about Health Alliance.”

Kudos to Professor Miller’s proposal for managed competition in health care! This is an excellent piece, despite the (current) absence of multiple, competing HMO arrangements in downstate Illinois. IF the State’s objective was to achieve this type of competitive landscape, they would have held the bidders to the REQUIREMENT that they have a delivery network in place before their bid was considered. The fact that it did not happen pulls back the veil of the real motivation in the State’s actions.

That real motivation is to move large numbers of health care consumers onto a “self-insured” plan, rather than use State (and participant) dollars to purchase an insured health care product. In my opinion, the entire motivation in this fiasco is to allow the State to spend money on other “needs”, instead of paying private insurer premiums. This “self-insurance” aspect allows the State to reduce current year payments and hide yet another unfunded liability from the public in the process. Expecting the State to make payments into a reserve funding arrangement for the future payments for health care provided is a bit like expecting the General Assembly to make annual contribution to the five State retirement plans that are so miserably underfunded. Doesn’t anyone remember “pension holidays” and “pension obligation bonds”? So, the same folks are going to reserve for health care expenses in a “self-insurance” plan? Right! My belief in that confirms my belief in Santa, the Easter Bunny and the Tooth Fairy!